10 Years On – G20 Reform Agenda Continues with Crypto in the Sights

A decade after it was tasked with driving reform of the financial system, the Financial Stability Board (FSB) has reported to G20 leaders that while much has been achieved, “promoting global financial stability is a continuous task”.

In a letter to the leaders, current FSB chair Randal Quarles says that the FSB’s transition from determined crisis response to the evaluation of the effects of post-crisis reforms as well as the rigorous assessment of emerging vulnerabilities and addressing them where needed, is underway.

Reporting on the work of the past year, Quarles highlights the “remarkable progress” that has been made in building a more resilient global financial system. He warns, however that regulators must remain vigilant to emerging risks. “The episodes of higher macroeconomic and market volatility during the past year have reminded us that advanced and emerging market countries alike are subject to unexpected shifts in economic and financial conditions,” Quarles states. “At the same time, rapid technological change and aging populations require continued focus on promoting a sound and efficient financial system that fosters strong, sustainable, balanced, and inclusive growth.”

Among the emerging vulnerabilities, Quarles cites corporate and public debt levels and the continued rise of non-bank financial intermediaries. On the latter point Quarles says that the FSB will develop a new surveillance framework on these firms by next year. “Drawing on the experience of the FSB’s expert and diverse membership, the new framework will support comprehensive, methodical, and disciplined assessment of vulnerabilities,” he writes.

As part of the report delivered to G20 leaders, the FSB has provided a study of the potential implications of new technologies leading to a decentralisation of financial services. Noting that a reduction or elimination of the intermediaries and centralised processes that have traditionally been involved in the provision of financial services could benefit financial stability in some ways, and may also lead to greater competition and diversity in the financial system, the study also observes that the growing use of such technologies could also entail various financial risks that need to be managed. “Regulators may wish to engage in further dialogue with a wider group of stakeholders, including in the technology sector, that have had limited interaction with financial authorities to date,” Quarles says.

One specific application of decentralised technology that the FSB says is already creating opportunities, and raising challenges, is crypto-assets. G20 leaders have been provided with a report on work underway on, and potential gaps in, regulatory and supervisory approaches to these developing assets. Quarles says that international organisations are working on a number of fronts to address issues, including consumer and investor protection, market integrity, anti-money laundering, countering the financing of terrorism, and understanding bank exposures to crypto-assets and potential risks to financial stability. “Though crypto-assets do not currently pose a risk to global financial stability, gaps may occur where crypto-assets fall outside the scope of regulators’ authority or from the absence of international standards,” he writes. “A wider use of new types of crypto-assets for retail payment purposes would warrant close scrutiny by authorities to ensure that that they are subject to high standards of regulation.

“The FSB and standard setting bodies will monitor risks very closely and in a coordinated fashion, and consider additional multilateral responses as needed,” he adds.

Although Quarles expresses satisfaction with the broader and ongoing reform process he does reiterate previously published concerns over fragmentation and an inconsistent pace of reform across jurisdictions. Previously the FSB has published reports on both topics and Quarles stresses that the outreach programme will continue.

“Financial stability risks transcend the G20 and are broadly global in nature,” he states. “Reaching out beyond its membership is therefore key for the FSB to achieve its mandate of promoting global financial stability. To strengthen the FSB’s outreach to non-member countries, the FSB is conducting a review of the effectiveness of the FSB’s six regional consultative groups, which are important networks for exchanging information and views on financial stability issues. I look forward to further enhancements in their contribution to our work.

“The FSB is also committed to improve communication and transparency with other external stakeholders, to facilitate wider input to the FSB’s work and increase understanding of what it does,” he adds. “The FSB is taking a number of steps to this end: standardising its public consultation process; improving accessibility of information provided to the general public, including through the publication of its annual work program; and adopting a structured approach towards stakeholder involvement in individual FSB initiatives.”